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May 14, 2020 – This week the SBA announced an additional safe harbor for PPP loan recipients, while the DOJ brought its first criminal charges for fraudulent representations made in a PPP loan application and media organizations sued for disclosure of the identities of all PPP borrowers. The Federal Reserve continued its efforts to implement the CARES Act economic stimulus, and House Democrats announced they would seek $3 trillion in additional federal economic relief to state and local governments and those hurt by the COVID-19 pandemic, setting up a confrontation with Senate Republicans.

CARES Act Developments

DOJ Brings First Charges for PPP Loan Fraud

On May 5, the DOJ Criminal Division charged two individuals in the District of Rhode Island with conspiring to fraudulently seeking more than a half-million dollars in forgivable Paycheck Protection Program loans. In their bank loan applications, the two men claimed to have dozens of employees earning wages at four different business. Three of those businesses had closed prior to the outbreak of the COVID-19 pandemic, and a fourth was not owned by the loan applicant. Specifically, they were charged with conspiracy to make a false statement in violation of 18 USC § 371 and conspiracy to commit bank fraud in violation of 18 USC § 1349. One of the men was also charged with aggravated identity theft in violation of 18 USC § 1028A while the other was also charged with bank fraud in violation of 18 USC § 1344.

On May 11, a district court in Flint, Michigan ruled that the SBA could not bar disfavored businesses from participating in the Paycheck Protection Program, saying that Congress intended to support all small businesses through the $660 billion federal relief program. Businesses disfavored by the SBA rule include banks, political lobbying firms, restricted private clubs and businesses that offer live performances or sell products of a “prurient or sexual nature.” The case is DV Diamond Club of Flint LLC et al. v. U.S. Small Business Administration et al., U.S. District Court, E.D. Michigan, No. 20-10899.

Federal Reserve Confirms Public Disclosure of Information on Borrowers

On May 12, the Federal Reserve outlined the information it will publicly disclose for the TALF and the Paycheck Protection Program. It will disclose on a monthly basis the name of each participant, the amount borrowed, interest rate charged, and value of pledged collateral. It will also disclose the overall costs, revenues, and fees for each facility.

On May 12, the Washington Post, the New York Times, Bloomberg, Dow Jones & Co. and ProPublica sued the Small Business Administration in D.C. District Court seeking access to records showing who received loans and the size of those loans made under the CARES Act Paycheck Protection Program and the Economic Injury Disaster Loan program. The plaintiffs’ attempts to obtain those records and other loan-specific information through FOIA requests were unsuccessful, despite assertions on the PPP loan application that such information was subject to disclosure under FOIA. The Federal Reserve previously announced that it would disclose such records on a monthly basis, although it has not yet done so. The case is WP Co. LLC et al. v. U.S. Small Business Association, case number 1:20-cv-01240.

On May 11, the Federal Reserve Bank of New York announced that on May 12 it would begin purchasing shares of eligible U.S.-listed exchange-traded funds in the secondary market through the Secondary Market Corporate Credit Facilities established by the CARES Act. It also said that it would begin purchasing eligible corporate bonds shortly.

On May 13, the Small Business Administration issued further guidance regarding loans made under the CARES Act Paycheck Protection Program. When applying for a PPP loan, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Previously, SBA announced that prior to forgiving a PPP loan of $2 million or more, it would audit the borrower to verify program compliance, including that the required certification was made in good faith. It also established a safe harbor for borrowers who repaid the loan in full by May 7, later extended to May 14, and then to May 18. In its May 13th guidance, SBA announced an additional safe harbor—that any PPP loan recipient who borrowed less than $2 million would be deemed to have made the certification in good faith. The safe harbor is intended to promote economic certainty, conserve SBA’s audit resources, and allow it to focus on auditing larger PPP loans. Further, SBA’s latest guidance states that with respect to recipients of PPP loans of $2 million or more, “[i]f SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.” See PPP FAQ 46.

Legislative Proposals

H.R. 6754: Protecting the Paycheck Protection Program Act of 2020

On May 8, Representatives Lizzie Fletcher (D-TX), Andy Kim (D-NJ), and Angie Craig (D-MN) introduced a bill that would ensure that small businesses with forgiven Paycheck Protection Program (PPP) loans are eligible to receive tax deductions for wages and other expenses paid during the period of the loan. This Act would supersede an IRS guidance that prevents business owners who have their PPP loans forgiven from claiming tax deductions on expenses paid using the government aid.

H.R. 6782: Small Business Transparency and Reporting for the Underbanked and Taxpayers at Home (TRUTH) Act

On May 8, Representative Dean Phillips (D-MN) introduced legislation which would direct the Small Business Administration to explain and justify the disbursements of coronavirus relief funds under the Payroll Protection Program and the Economic Injury Disaster Loan Program. The TRUTH Act would require the SBA to disclose every recipient of a grant or loan, an explanation for the loan decision-making process, how many employees the borrower has, and size of the grant or loan.

S. 3676: Access to Credit for Small Businesses Impacted by the COVID–19 Crisis Act of 2020

On May 8, Senator Ron Wyden (D-OR) introduced legislation that would provide a one-year exemption to a lending cap that currently restricts the size of loans that credit unions can make to small businesses. The cap prevents credit unions from lending more than 12.25% of their assets to small businesses.

On May 12, House Democrats proposed (but have yet to introduce) a new $3 trillion relief package to address the economic harm caused by the COVID-19 pandemic. The 1,815 page bill includes $915 billion to state, local and tribal governments and U.S. territories. It also expands direct relief to individuals by providing another round of direct stimulus payments of up to $6,000 per household, extending the $600-per-week supplemental unemployment benefit through January 2021, and expanding student loan debt forgiveness to private student loans. In addition, it allocates $200 billion in hazard pay for first responders and frontline workers, $75 billion for increased coronavirus testing, $175 billion in rent and mortgage assistance, $116 billion to the food and agricultural sector. Republicans declared the bill “dead on arrival.”

S. 3702: A Bill to Appropriate Additional Amounts to Provide Loans Under the Paycheck Protection Program to Community Development Financial Institutions and Minority Depository Institutions, and for Other Purposes

On May 12, Senators Edward J. Markey (D-MA) and Tammy Duckworth (D-IL) introduced legislation that would set aside $10 billion of the funds allocated to the PPP federal relief program, to be used by Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs). The legislation would also require SBA to report the gender, race, ethnicity, and socioeconomic status of each recipient of a loan under the PPP in order to shed light on the demographics of the loan recipients.

On May 12, Representatives Anthony Gonzalez (R-OH), Dave Joyce (R-OH), Darin LaHood (R-IL), Brad Wenstrup (R-OH), and Stephanie Murphy (D-FL) introduced a bill which would extend certain deadlines under the Paycheck Protection Program. It extends the requirement that the borrower must spend the funds within 8 weeks of origination to 12 weeks. It also extends the PPP’s June 30 deadline for rehiring employees to July 31.

On May 13, Senators Joe Manchin (D-WV), Mitt Romney (R-UT), Patrick Leahy (D-VT), Cory Gardner (R-CO), and Ron Wyden (D-OR) introduced legislation which would extend the PPP loan forgiveness period from 8 to 16 weeks and would change the employee rehire date from June 30th to 16 weeks after the loan is awarded.

On May 13, Representatives Gregory W. Meeks (D-NY) and Ayanna Pressley (D-MA) introduced a bill which would ensure that relief payments made under the CARES Act cannot be garnished to settle debts or other obligations. The representatives have also asked various federal agencies charged with implementing the relief program to issue guidance to restrict financial institutions from seizing stimulus payments to settle outstanding debts, although they have not yet done so.